Wednesday, August 02, 2006

Minimal Economics

Megan McArdle is guest blogging at Instapundit. She talks more about economics than most, but since there is an interesting debate about the joint minimum wage/estate tax bill that is before congress right now, it’s interesting stuff. Democrats seem beholden to minimum wage increases, like they are the end-all bandage for the poor in this country, but it’s surprising to me that Republicans are giving in to such a large increase. Oh, wait, it’s an election year. Right. Plus they would get their tax cut on inherited estates which they’ve been pushing for years.

. . . but the problem is that, as a poverty fighting weapon, the minimum wage is an exceptionally blunt instrument. Only about half of the people earning the minimum wage are adults; the rest are teenagers and young adults, many of whom come from relatively affluent families. According to this paper from the Clinton-era Department of Health and Human Services, only about 30% of the people receiving minimum wage live in families near or below the poverty line . . . a result that is hardly surprising, since the overwhelming majority of minimum wage workers worked less than twenty hours a week--so much less that the average workweek for all minimum wage workers was less than 10 hours in 1998. This would suggest that most people working at minimum wage are supplementing their studies, or their spouse's income, rather than trying to support themselves with such a job. So in order to get to the relatively small number of people who need the money, we provide a subsidy to the 71% who do not. This is not very efficient social policy.

Not only that, but wage hikes always proceed drops in employment among minimum wage workers, falling disproportionately on those who need them most.

Other negative effects of raising the wage: 1. Employers cut costs in other areas. This could be a positive, but often results in the employer cutting perks, training, benefits, turning off the air conditioning, buying cheaper supplies. Also, workers will be asked to produce more, in keeping with their higher wage.

2. Prices may (and often will) rise as a result, and poor people are more likely to shop or eat at a place that pays minimum wage.

3. As above, the job market will constrict, as workers compete with labor saving equipment that becomes more cost effective than they do (technology tends to reduce in cost over time, as opposed to wages).

Megan instead thinks we should be utilizing the Earned Income Tax Credit, as it actually targets the poor more effectively.

The cost of the EITC is offset in part, they note, by a reduction in the number of single mothers receiving welfare. Moreover, the EITC now lifts more children out of poverty than any other government program. In 2002, it removed 4.9 million people, including 2.7 million children from poverty. Advocates see it as promoting the values of both family and work. Traditional welfare programs, according to their critics, do the opposite.

As for the Estate Tax issue, the only response from Democrats (who are vehemently opposed to this bill) is that it helps the rich. Well, for the most part, yes. But that’s not solely who it benefits, and considering some of the original tenets of our society, one of them was that people shouldn’t get double taxed by the government, and taxing inheritances is a tax on money that was already taxed when it was made. We should be eliminating this on principle alone. And this is probably the biggest carrot the Republicans are going to dangle just to get their way on the estate tax issue.